Federal Reserve Will Fall into Dilemma

Knock-on effects caused by the debt issue of Evergrande, coupled with the debt ceiling showdown in the U.S., has exerted influences on the American stock market even financial markets around the world. The situation is likely to trap the two-day meeting held by the Federal Reserve (Fed) into a dilemma as it concerns that the instability of the financial market will be exacerbated, providing the announcement of the withdrawal from the quantitative easing (QE) at this special moment. Therefore, the Fed may face a gridlock based on the analysis of the current situation.

An idea shared by almost the whole financial market is that the schedule of the withdrawal from QE will be officially released in the meeting on September 22 by Powell, the present chair of the Fed. According to the prediction in the market, the Fed will embark on cutting bond purchases down in November, finish this reduction in six months, and launch interest-rate hikes at the end of 2022. However, it is possible for the Fed to postpone the announcement of the timetable in a bid to boost stock markets worldwide, owing to the changes seen by the financial market at present. If the Fed is bound to release the plan for withdrawal, it may set up the inception in December 2021 even January 2022 instead of the original time, November 2021. In addition, the withdrawal may be completed in a year rather than half a year as original to help cushion the blow to the financial market.

However, in my opinion, Powell may not be hawkish in the field of withdrawal based on his working style even if no turmoil hits the financial market, let alone the current situation rife with fluctuations. Hence, if the Fed announces to slowly withdraw from QE in its meeting, adjustments may be carried out to DXY to ride the tide of this conduct, while non-American currencies, gold and the U.S. stocks will boast a chance to rebound. Moreover, it is worth noticing the direction where the global stock market is moving. When it is adversely affected by stock markets in China and the U.S., both JPY and USD have a chance to play a role as a safe haven currency, thus being popular.